Press Room: Tax Release

September 25, 2013

Navigating the Final Tangible Property Regulations

The newly issued final regulations provide much needed simplification and clarity. Taxpayers are required to implement these rules in their first tax year beginning on or after January 1, 2014, and most taxpayers will require one or more method changes.  Taking advantage of these favorable rules generally will require taking action and revising accounting systems prior to the year of change.  It is important to review the application of these rules prior to year end.   

Your WTAS client service team can help you understand and implement the new requirements.

Highlights of the Final Regulations:

  • The regulations apply to taxable years beginning on or after January 1, 2014.  For taxable years beginning on or after January 1, 2012, and before January 1, 2014, taxpayers may rely on the final regulations or the existing temporary regulations.

What’s New in the Final Regulations?  Highlights include:

  • The new regulations include a simplified de minimis safe harbor that allows a taxpayer with an applicable financial statement (AFS) to deduct items that cost $5,000 or less, so long as the amount is expensed on its AFS.  To take advantage of this safe harbor, taxpayers must have a written policy in place at the beginning of the year. 
  • A similar safe harbor is available for taxpayers without an AFS, however that safe harbor amount is only $500.  The final regulations also expanded the dollar threshold for materials and supplies to include property that has an acquisition or production cost of $200 or less. This is an increase over the $100 or less threshold in the current temporary regulations.
  • Both safe harbors require an annual election.

WTAS Observation – These new safe harbors present a great opportunity for taxpayers to simplify and align their book and tax accounting.

  • A “routine maintenance” safe harbor is now applicable to buildings as well as to other property.  The routine maintenance safe harbor for buildings covers activities such as cleaning, inspection and testing of building structures or systems.  Maintenance will be considered routine only if a taxpayer reasonably expects to perform the maintenance procedure more than once during a ten year period on a building, or more than once in the class life of non-building property. 
  • An additional safe harbor was added for qualifying small taxpayers allowing them to deduct improvements made to an eligible building.  The taxpayer must have less than $10M of average annual gross receipts and the unadjusted basis of the building must be less than $1M.  Per building deductions are the lesser of $10,000 or 2% of the unadjusted basis of the building.
  • The regulations do not provide a bright- line test for repairs, but provide clarification by examples.  In addition, newly proposed regulations would clarify that a taxpayer who makes a repair that is capitalizable can elect to retire the part or component that was replaced. 

Practical Advice from WTAS:

To prepare for the new regulations, WTAS recommends a step-by-step approach to adoption of this guidance.  We encourage taxpayers to assess their current situation and develop a plan of action to ensure compliance with the regulations and to take advantage of new opportunities.

Assess the Current Situation:

  • What categories of fixed assets exist, and what is the dollar magnitude of each?
  • What are the current fixed-asset capitalization policies (as documented and as followed)?
  • What are the materials and supplies policies (as documented and as followed)?
  • What 3115’s have been previously filed as to the treatment of fixed assets, repairs, materials, and supplies?
  • What deficiencies exist as to fixed-assets records, and what records are available?
  • What parties and processes are involved in determining whether to expense or capitalize expenditures?

Develop a Plan of Action:

  • An appropriate first level analysis may take only days to conduct and implement.
  • It may be necessary to address the impact of the regulations in the company’s financial statements in the current period.
  • A longer-term implementation plan may be required for taxpayers with significant tangible property expenditures.
  • Many taxpayers will find the new rules will provide a benefit to them.
  • If needed, taxpayers should confer with tax technical advisors to assist in organizing an action plan.
  • Taxpayers should avoid “black box” solutions, which do not address each taxpayer’s unique circumstances
  • Software applications may be utilized to speed and organize the analysis.
  • Timely elections as well as adoption of capitalization policies will be critical to achieving the optimal results.
  • Documentation as to the effect of method changes and as to adopted methodology will be important.

There’s much more to know and many tax planning opportunities to uncover – and WTAS is here to help you navigate this new guidance.